Demand

The CBD micro-market recorded net absorption of 5,352 sq m in 4Q09 as compared to negative absorption in the first three quarters of the year. The exodus of occupiers towards cost-effective suburban locations came to a halt primarily due to correction in prices. While there was no new supply, HT House of 5,203 sq m (56,000 sq ft) in Kasturbha Gandhi Marg was refurbished and added to total stock. This building, previously occupied by the Hindustan Times Press was entirely leased out to the World Bank in 4Q09. Similarly, transactions in other buildings such as Birla House resulted into an overall dip in vacancy in the CBD to almost 1.5% in 4Q09 from 2.2% in 3Q09.

Similarly, significant correction in rental pricing resulted into large-scale transaction activity in the SBD (primarily Jasola). Gurgaon also recorded many IT as well as commercial leases during this quarter, many of which were expansions. Rents in the NCR further depreciated to reach their lowest level in the past two years, which also provided an impetus for corporates to lock in leases at existing rents. This led to a slight increment in net absorption level in the NCR from the previous quarter.

Non-IT tenants, especially those from the banking, financial services, telecom and manufacturing sectors, continued to be active. A few IT tenants like Wipro and Ericsson also locked in leases at prevailing attractive rentals.

Key transactions in the prime city in 4Q09 include:

• CCI leasing 57,000 sq ft (5,295 sq m) in HT House along Kasturbha Gandhi Road, CBD; and

• Hyundai leasing 50,000 sq ft (4,645 sq m) in Baani Corporate One in Jasola, SBD.

Supply The CBD did not witness any new supply addition in 4Q09, except for the 5,203 sqm (56,000 sq ft) of refurbished space in HT House. Meanwhile, the SBD witnessed the completion of DMRC IT Park with builtup area of 330,000 sq ft (30,658 sq m) in East Delhi, leased out entirely to the Royal Bank of Scotland (RBS).

The total commercial office stock in the SBD stands at 4.70 million sq ft (437,388 sq m). Owing to the substantial leasing activity, the vacancy rate in the SBD declined from 24.0% in 3Q09 to 21.0% in 4Q09.

Asset performance

In 4Q09, the decline in rentals continued to slow down across most of the markets, with Grade A office space rentals in the CBD declining by an average 2.7% q-o-q to INR200 (RM14.73)-230 per sq ft per month. Rents in the SBD also softened marginally this quarter, witnessing an average correction of 6.7% q-o-q to INR140 per sq ft per month. The softening of rents in the CBD and SBD was primarily driven by exodus of occupiers to cost effective locations within Gurgaon.

12-month outlook

The rental decline has softened, paving the way for rental stability in 2010. However, we foresee short-term correction in 1H10 as landlords compete to attract incoming demand. We believe that this is the right time for occupiers to lock in leases at prevailing low rentals in the prime city market, where future supply is relatively eased out. However, the excessive supply expected in the suburbs with poor pre-commitment will continue to aggravate the vacancy rates in the area and put further pressure on rents and sales prices. Thus, developers in the suburbs will have to be flexible in their rental quotes and services being offered to occupiers.

Delhi: Prime Retail

Demand

Even though many retailers announced aggressive expansion plans for the year going forward, queries for retail space were restricted to few malls in select locations. With developers offering attractive deal structures and revenue-sharing model, retailer interest has revived for opportunistic leasing. However, this interest is restrictive in nature, and developers are still struggling to attract retailers. Malls that are under construction have high expectations from multiplex operators and hypermarkets to anchor large spaces. However, developers have been successful in converting very few enquiries into actual transactions.

4Q09 witnessed improved footfalls, increased sales volume. With improved consumer sentiments and sales forecast figures for 2010, retailers are expected to focus on their expansion plans leading to fresh demand.

Select mall projects that have good design, favourable location and professional mall management are expected to witness healthy absorption in 2010.

The average vacancy level across all micro-markets increased from 20.6% in 3Q09 to 21.3% in 4Q09. This was on account of a rise in vacancy level in Prime Others from 33.7% in 3Q09 to 37.9% in 4Q09. Net absorption in NCR retail market in 2009 was observed at 445,000 sq ft (41,400 sq m) compared with 959,000 sq ft (89,100 sq m) in 2008.

Key Transactions in 4Q09:

• Planet Fashion - 5000 sq ft in DLF Place Saket in Saket District Centre; Prime South

• Adidas - 1500 sq ft in MGF City Square in Shivaji Place District Centre - Prime Others

Supply

The Delhi retail market witnessed completion of two new malls in 4Q09—100,000-sq ft (9,290 sq m) D Mall by Mera Baba Realty Associates in Pitampura and 150,000 sq ft (13,935 sq m) West Mall by PP Estate in Janakpuri. Both malls are located in the North West Delhi region (Prime Others micro-market of NCR).

The malls have long been strata sold by developers and do not provide adequate space for large anchor retail or multiplex operators. Both malls commenced operations with low occupancy.

Asset performance

With major correction recorded in 1H09, the rate of decline in rental and capital values slowed down in 2H09.

In 4Q09, the correction in rents in the NCR retail market continued at almost a similar rate as observed in 3Q09.

Mall rents fell by 6.0% q-o-q in Prime South (compared with 7.4% in 3Q09), 8.0% in Prime Others (7.4% in 3Q09) and 12.2% in the Suburbs (10.3% in 3Q09). On a y-o-y basis, the correction was steep in 2009. Rents in Prime South corrected by 35.0% in 2009 (compared with 4.0% in 2008), 45.0% in Prime Others (16.0% in 2008) and 46.0% in the Suburbs (17.0% in 2008). While rents and capital values almost corrected by 50.0%, net absorption in 2009 was not even half of the level seen in 2008.

12-month outlook

Albeit the optimistic economic forecast and improved growth projections for 2010, the retail mall market will take longer to recover. Even though each micro-market has a couple of malls that will help lead recovery, the oversupply will continue to put pressure on rents for a longer time period. In terms of stock under construction, about 4.5 million sq ft (410,000 sq m) of retail space could be ready by end-2010. Based on the market activity in 1Q10, there will be more clarity on supply delays and rental pressures for 2010.

Mumbai: Grade A Office

Demand

Post 1H09, demand for commercial real estate in Mumbai started inching upwards owing to the improved business sentiment, economic stability and reduced asset pricing. For the full-year 2009, prime micro-markets of the city recorded a total net absorption of 840,000 sq ft (78,058 sq m), about 90.0% of which took place during 3Q09–4Q09. In the last quarter, the city witnessed net absorption of 520,000 sq ft (48,300 sq m), which pushed the overall vacancy level to 6.91% in 4Q09 from 7.04% in 3Q09.

Real estate cost rationalisation was the key consideration for occupiers in 2009, thus transactions were a mix of fresh requirements, relocations and consolidation of operations. Mumbai did not witness any noteworthy demand from the IT/ITES sector in 2009, which is a cause of concern for developments in the suburban districts of the city.

Major transactions in 4Q09 include:

• Unitech leasing 2,500 sq ft (232 sq m) in Peninsula Corporate Park, SBD Central;

• LH Funds leasing 2,500 sq ft (232 sq m) in Hallmark Plaza, SBD North;

• Tyco leasing 6,000 sq ft (557 sq m) in Windsor, SBD North; and

• MOL leasing 30,000 sq ft (2,787 sq m) in Kalpataru Square, SBD North.

Supply

In 4Q09, three projects were completed in the secondary business districts (SBDs) of the city, amounting to 535,000 sq ft (49,703 sq m) in total leaseable area. The 90,000 sq ft (8,341 sq m) Raheja Chromium was the sole completion in SBD Central. Motilal Oswal, a financial services company bought the entire building. SBD North witnessed the completion of Nucleus Tower and 215 Atrium located at Kalina and Andheri, respectively.

Nucleus Tower was entirely leased to JP Morgan, whereas 215 Atrium is a multi-tenanted building. Mumbai's prime micro-markets have significant future supply in the pipeline, with 9.7 million sq ft (904,714 sq m) of commercial space expected to be operational in 2010. The 400,000 sq ft (37,161 sq m) Lodha Excelus and the 577,000 sq ft (53,605 sq m) Cresenzo are the major projects expected to be completed in the next three to six months.

Asset performance

Mumbai witnessed a q-o-q correction of 2.0%–4.0% across prime micro-markets in 4Q09. Since 3Q08, the city has recorded a total correction in the range of 39.0–42.0% across various micro-markets.

Capital values remained stable at last quarter levels, thus resulting in contracting yields. The average yield across these precincts was recorded at 12.36%.

12-month outlook

Asset pricing in all the micro-markets are nearing their bottom. We, therefore, expect pricing to remain range bound starting 2H10. Prices might soften in 1H10 as demand will remain slow and selective in the short-term.

Demand for office space is expected to be strengthened as we see RFPs (Request for proposal) floating in from various industries. Supply pressure on asset pricing will remain strong during 2010, and we expect the secondary micro-markets to take a long time before prices start moving upwards in 2011.  Proposed projects and future phases of current projects may be delayed from their announced timelines.

Mumbai: Prime Retail

Demand

Mumbai witnessed a net absorption totalling 22,180 sq ft (2,060 sq m) in operational malls during 4Q09.

Despite an improvement in transaction activity during the second half of 2009, leasing transactions in malls were significantly lower than previous years. Mumbai recorded a net absorption of only 814,000 sq ft (75,691 sq m) for the entire year of 2009, which is about 27% of the 2008 value. Overall vacancy reached 17.9% at end-2009, which was 340 basis points higher than the end-2008 value.

Mumbai retail market is still undergoing a phase of subdued demand with only a few RFPs (request for proposals) converting into lease transactions. Consequently, the overall market sentiment in the city remained bleak.

Some of the key transactions in 4Q09 include:

• Reliance Footprint leasing 3,900 sq ft (362 sq m) in Korum Mall, Thane, suburban area;

• Osim leasing 485 sq ft (45 sq m) in R-City Center, Ghatkopar, suburban area; and

• Vision Express leasing 900 sq ft (84 sq m) in Korum Mall, Thane, suburban area.

Supply

No new completion was recorded in 4Q09 in Mumbai. In 2009, global economic crisis, cautious retailers and weak market sentiment suppressed demand for retail space in the city to its lowest level in four years. Poor demand coupled with falling rents compelled developers to delay some projects under construction and cancel some of the proposed developments. Construction delays were evident across the city in 2009, and only two malls, totalling 1.4 million sq ft (130,064 sq m), were operational.

The city now has 37 operational malls with a total area of about 11.2 million sq ft (1,038,886 sq m) and an overall vacancy level of 17.9%. R-Mall, Thane and Central store (department store format) by Future Group at 247 Park in Vikhroli are expected to become operational in the next three months.

Asset performance

In 2009, rents for retail space across Mumbai fell by 27%–50% from their 3Q08 peak—a trend, which abated in 2H09. A correction of up to 6.0% was observed across the city in the fourth quarter. Anchor tenants, such as Pantaloons, Lifestyle and Shoppers Stop, increasingly refrained from entering leases with fixed rents, instead showing preference towards revenue-sharing arrangements with developers.

12-month outlook

Mumbai has a significant future supply in the pipeline with about 4.65 million sq ft (432,650 sq m) of additional retail space expected to become operational in 2010. Demand for retail space is expected to rise as signs of economic recovery get stronger through the year 2010. However, the upcoming supply will likely keep asset pricing under pressure in 2010.

Bangalore: Grade A Office

Demand

The Bangalore office market witnessed an increase in leasing activity in 4Q09 as compared with 3Q09. The increase in absorption for office space is mainly lead by the opportunistic demand that has returned to the market aiming at locking rentals at current attractive levels. Overall market sentiment and corporate confidence have also improved compared to 1H09.

The net absorption in CBD and SBD together increased to about 1.58 million sq ft (147,231 sq m) in 4Q09 from 0.59 million sq ft (55,667 sq m) in 3Q09. The CBD and SBD together witnessed about 5 million sq ft of net absorption in 2009 as compared to about 4.5 million sq ft in 2008.

Key transactions in 4Q09 include:

• LSI Logic leasing 125,000 sq ft (11,613 sq m) in Global Tech Park, Outer Ring Road, SBD;

• Lloyd Bank leasing 6,500 sq ft (604 sq m) in Bagmane Tech Park, CV Raman Nagar, SBD;

• Danfoss leasing 3,000 sq ft (279 sq m) in HMG Ambassador, Residency Road, CBD; and

• Mercedes-Benz leasing 26,500 sq ft (2,462 sq m) in Maruthi Infotech Centre, Inner Ring Road, SBD.

Supply

A total of 1.6 million sq ft (150,131 sq m) of office stock was added in the CBD and SBD micro-markets of Bangalore in 4Q09. The market witnessed the completion of three buildings — Pri Tech Park (7A and 7B) and Bagmane World Trade Center along Outer Ring Road and Golden Heights in Rajajinagar.

Asset performance

The average rental for CBD office space declined from INR79 per sq ft per month in 3Q09 to INR74 per sq ft per month in 4Q09. However, the average rental in the SBD micro-market remained at 3Q09 levels. The weighted average rental value in CBD and SBD corrected by about 4% q-o-q in 4Q09, which is about a correction of 25% from its peak in 3Q08.

12-month outlook

Considering the projects that are under construction and in the pipeline, we expect the situation of excess supply to continue in 2010. The projected demand may not be able to absorb the supply in the pipeline which will lead to an increase in overall vacancy levels in the city. Certain projects will commence operations with poor occupancy. Thus, both rental and capital values are expected to remain range bound in 1H10.

Bangalore’s supply pipeline is relatively regulated as compared to other major cities of India. The SBD in Bangalore will continue to attract a lion share of demand followed by Whitefield.

Bangalore: Retail Market

Demand

Net absorption in Bangalore’s retail market in 2009 was low primarily due to a single completion through the year. Overall vacancy levels increased from 2.4% in 3Q09 to 3.2% in 4Q09. This increase in vacancy was due to the completion of Mantri Mall in the secondary micro-market with some vacant space.

Key transactions include:

• McDonald's leasing 3,500 sq ft (325 sq m) along CMH Road, Indiranagar, high street;

• Uninor leasing 1,000 sq ft (93 sq m) along 80 Feet Road, Koramangala, high street;

• Peter England People leasing 4,500 sq ft (418 sq m) in 100 Feet Road, Indiranagar, high street; and

• Gini & Jony leasing 2,500 sq ft (232 sq m) in Commercial Street, high street.

Supply

The fourth quarter of 2009 witnessed the completion of Mantri Mall in Malleswaram with a built-up area of 500,000 sq ft (46,452 sq m).

A considerable number of malls that were originally scheduled to commence operations in 2009 were postponed into 2010 expecting retailer demand to improve.

The future supply of malls that are expected to be completed in Bangalore between 2010 and 2011 stands at 5.9 million sq ft (548,128 sq m). Malls that are likely to be completed across the micro-markets in 2010 include Signature Road Mall along Old Madras Road, Sigma Grand along Outer Ring Road, Innovation Mall along Bannerghatta Road, Orion Mall in Rajaji Nagar, Soul Space I and II along Outer Ring Road and Park Square in Whitefield.

Asset performance

All the micro-markets in Bangalore witnessed corrections in ongoing rentals. The average rental for prime malls declined from INR 183 per sq ft per month in 3Q09 to INR180 per sq ft per month in 4Q09. Meanwhile, the average rental for secondary malls witnessed a decline from INR92 per sq ft per month in 3Q09 to INR88 per sq ft per month in 4Q09.

12-month outlook

The rate of decline in rental values significantly slowed in 4Q09 as compared to earlier in the year, indicating the bottom is near. We believe this offers an attractive opportunity to retailers to lock-in quality space in upcoming malls at current attractive prices. We foresee leasing to improve in 2010 but restricted to quality projects at good locations. However, we believe rental and capital values will remain range bound in the near future as demand will be slow and selective.

Hyderabad: Grade A Office

Demand

Hyderabad witnessed a strong increase in transaction volume in 4Q09 which triggered optimism in the office market. However, negative absorption due to consolidation or downsizing by occupiers increased vacancy levels to double-digit values across all micro-markets. There were instances where occupiers moved out of the CBD to relocate to the suburbs for cost efficiency. In 2009, office market demand, which is highly dependent on the IT/ITES industry, witnessed new drivers coming from other industries, such as pharmaceuticals, telecommunications and infrastructure.

The CBD and SBD of Hyderabad witnessed significant improvement in demand in 2009 as compared with 2008. Overall, net absorption in the CBD and SBD was 55,229 sq ft (5,131 sq m) in 2009. However, the market sentiments remained low as the vacancy level increased in 2009 as compared to 2008 due to negative absorption, occupier relocation and completion of new buildings at low occupancy. The overall vacancy increased to 16.58% in 4Q09 from 6.71% in 4Q08.

Key transactions in the CBD and SBD in 4Q09 include:

• SKS Microfinance leasing 80,000 sq ft (7,432 sq m) in Ashoka Raghupathy Chambers, Begumpet, CBD;

• Dhanush Infotech leasing 30,000 sq ft (2,787 sq m) in Laxmi Towers, Secunderabad, CBD;

• Zeta Technologies leasing 24,000 sq ft (2,230 sq m) in a commercial building at Punjagutta, CBD;

• WTTL leasing 10,000 sq ft (929 sq m) in Gowra Trinity, Begumpet, CBD;

• SQL Star leasing 15,000 sq ft (1,393 sq m) in a commercial building at Banjara Hills Road No 14, SBD.

Supply

Hyderabad witnessed an overall supply of about 4 million sq ft in 2009, and the total city office stock stood at 18.5 million sq ft. A majority of the new supply became operational in the suburban micro-markets of Hitec City and Gachibowli. In 2009, the CBD witnessed the completion of two buildings with a total built-up area of 28,243 sq m; while the SBD did not witness any new supply. Many buildings that were expected to be operational in 2009 remained under construction due to lack of demand.

Asset performance

Rental values across all micro-markets in Hyderabad corrected by 20.0%–25.0% in 2009 compared with 2008.

The markets witnessed a sharp decline in rental and capital values in 1H09; after which, the rate of decline slowed down in 3Q09 and stabilised by 4Q09. The rental values in CBD and SBD witnessed a correction of 21.0% and 20.0%, respectively, in 4Q09 as compared with 4Q08. While the capital values declined by 25.0% in CBD and 24.0% in SBD in 4Q09 as compared with 4Q08.

12-month outlook

Although the demand condition is expected to improve in 2010, the oversupply situation in the city will continue to keep rental values under pressure until end-2010 in the suburban districts. However, we believe that rental values have bottomed out and any further major correction is unlikely. Hyderabad will witness tough competition in terms of demand from cities such as Chennai and Pune, which are also offering space at competitive rentals.

Hyderabad: Retail Market

Demand

The market sentiment improved in 2009 from 1H09 to 2H09. Malls in the city witnessed an increase in footfalls from 3Q09 onwards, which continued until 4Q09, primarily led by festive season. The demand for space in high-streets dominated the demand for mall space in 2009 as they offered good visibility and cost efficiency. High-street landlords are providing underground parking facility and amenities like escalators in their new projects to attract retailers.

The major stores that were operational in 2009 on the high-streets were Westside and Landmark at Somajiguda and Landmark at Banjara Hills. In addition, many luxury and premium national and international retailers started operations in the city with the opening of GVK One Mall at Banjara Hills. The vacancy rate increased to 3.73% in 4Q09 from 2.20% in 4Q08. The net absorption in the prime central micro-market in 2009 was 890,155 sq ft (82,698 sq m).

Key transactions in 4Q09 include:

• Jack & Jones leasing 5,000 sq ft (464.5 sq m)on the high street at Jubilee Hills Road No 36, Prime Central;

• KFC leasing 2,300 sq ft (213.6 sq m) on the high street at Dr A S Rao Nagar, Suburbs;

• McDonald’s leasing 1,085 sq ft (100 sq m) at Inorbit Mall, Hitec City, Prime Suburbs; and

• Wild Craft leasing 470 sq ft (43.66 sq m) at Inorbit Mall, Hitec City, Prime Suburbs.

Supply

Hyderabad witnessed the opening of two malls in 2009. GVK One Mall at Banjara Hills in the Prime Central micro-market and Inorbit Mall at Hitec City in the Prime Suburban micro-market and added 0.9 million sq ft to the total stock. Both these malls are landmark properties in the city as GVK One Mall houses luxury and premium brands, while Inorbit Mall is the first mall in Hitec City. Both malls became operational with high occupancy as significant space was pre-leased in 2007-08. Some of the malls that were expected to be operational in 2009 were postponed due to the slow demand.

Asset performance

All of the micro-markets witnessed a decline in rental values owing to the demand slowdown. Rental values in the prime central micro-market declined by 30.0% y-o-y in 4Q09, which is about 40.0% from the peak in 3Q08.

Capital values remained stable in 4Q09 after declining by 31% from the peak in 3Q08 until 1H09.

12-month outlook

Overall, high streets will continue to dominate the market as compared with malls in the medium-term. The supply of malls will remain subdued even in 2010, and the city will witness about 0.72 million sq ft of supply both including the Prime Central and Prime Suburbs micro market. Rental values are expected to stay range bound as demand and supply conditions remain poor in 2010.